The prolonged lockdown in Shanghai — and now beginning in Beijing — is just one of the problems facing the Chinese economy. The long, slow Covid-19 grind is having a significant impact on business with manufacturers unable to access raw material, and, if they can, then they are unable to transport the finished product.
Many readers will be familiar with the shipping traffic displays that show the port congestion in Shanghai, Tianjin, Dalian and every other major Chinese port. This is not just an economic problem for Western businesses reliant on Chinese products. It is a major problem for those Chinese businesses — and joint venture businesses — that rely on exporting their products.
The economic effect of these lost business opportunities and interruptions to business activity is no longer just a ripple. It is a spreading tidal wave that cascades down the economy, from the factory floor to the sidewalk café that provides workers with jian bing snacks for breakfast. It is also an economic force strong enough to reverse the flow of people from the country-side to the city as displaced and unemployed workers return to their home towns and provinces.
Most of all, it is a recipe for social instability and that is the worst fear that any government faces. This economic lockdown has a growing impact on Western business engagement in China. This is seen in the increasing number of expatriates leaving China because they can no longer tolerate the lockdowns.
When business stops, then all their support service business also grind to a halt. Any business activity that requires face to face meetings is either in lockdown, or under the threat of lockdown. It also means that many bank transactions for foreign payments cannot be processed because they require a visit to the bank and that is just not possible in a lockdown environment.
What was once an irritation now has the capacity to deliver a significant blow to cash flows. The digital economy is a replacement, but it is an even more crowded space now as thousands of newly locked down workers turn their hand to digital business solutions.
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The second problem has two aspects. It is exemplified by the actions the US is taking in relation to Chinese state-owned video surveillance equipment makers Hikvision Digital Technology. Its cameras are used in cities worldwide, and are considered pivotal to crime prevention and helping build ‘‘smart cities’’ of networked urban environments.
The US is considering imposing the harshest measures so far with new sanctions on the surveillance technology giant. The Joe Biden administration may add the maker of cameras and surveillance systems to its Specially Designated Nationals and Blocked Persons List. These actions — like those taken against Huawei — are also designed to confer a commercial advantage to the American competitors of these Chinese companies.
The US is emboldened by its use of sanctions against Russia. China, in the meantime, is concerned that the same tools may be turned on them. This includes the (ab)use of the Swift (Society for Worldwide Interbank Financial Telecommunication) trade settlement system.
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The second aspect of this activity is that the more severe sanctions under consideration would make Hikvision’s global customers potential targets of US action. This is creating a fresh wave of investment uncertainty because other successful Chinese companies could be targeted in this way.
Currently these are background problems, but coming on top of the Covid-19-induced economic slowdown, they contribute to a deteriorating outlook for China in the short-term.
Technical outlook for the Shanghai market
Despite the current rally recovery, the Shanghai Index remains in a severe downtrend. The Index overshot the head and shoulder target level but then rallied and is now consolidating around the target level.
The downside target for this head and shoulder pattern was near 3,040. The pattern consists of a head, or peak, and two lower shoulders. The first left shoulder was formed around June 2021. The head, or peak, developed in September 2021. The right shoulder formed during December 2021. A neckline is plotted between the low points of the two shoulders. The distance between the neckline and the head peak is measured. This value is projected downwards to provide the downside target near 3,040.
The index has paused around the 3,020 level but there is no indication of good strength. A bullish recovery has resistance near the lower edge of the long-term Guppy Multiple Moving Average (GMMA). This is around 3,100. However, the wide separation in this group suggests there is a low probability of a significant breakout rally.
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There is a higher probability the market will react away from those resistance features and continue with the downtrend.
The monthly chart provides details of the next support level. This is a narrow support band. The upper level of the support band is near 2,620. This was tested in February 2016 and again in December 2018.
The lower level of this support band is near 2,420. This was tested as a resistance level in the first months of 2012. Later, this level acted as a support level in January 2019. This narrow support band is not a well-defined support feature so investors will watch for evidence that this support band can be effective.
A fall to this level means that investors would look for consolidation in this region and wait for evidence that a rally rebound can develop from this consolidation area. Any rally from this level meets resistance near 3,040 which is also the head and shoulder pattern downside target level.
The GMMA indicator remains very bearish. The long-term group of averages which indicate investor thinking show that investors remain very bearish. This is confirmed by the consistent wide separation in this group of averages. This group has accelerated its downward trend.
The short-term group of averages, indicative of the way traders are thinking, also remains in bear mode with no significant or sustainable compression that would indicate a weakening of bearish pressure. Both traders and investors are committed sellers in this environment.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. The writer owns China stock and index ETFs.
Photo: Bloomberg
